Thursday, September 30, 2010

The bond market rally has prompted some market observers to declare that bonds are in a bubble. FT Alphaville pointed out that research from Morgan Stanley indicates that money flows into US bond mutual funds now exceed purchases of US stock funds that occurred at the height of the TMT (Tech-Media-Telecom) bubble:

What is forgotten in this analysis is that the bond market is substantially larger than the stock market. The size of the US bond market is estimated to be between $31T and $34T. By contrast, the total market capitalization of the Wilshire 5000, which encompasses virtually all of the investable stocks in the US, variees in the $13T to $15T range.

If this is indeed a bond bubble, then based on the disparity between the size of the stock and bond markets and the funds flow data, bond prices have the potential to run much, much further than anyone expects.

1 comment:

My own counter-question to the question of whether US treasuries can run much further has been:

What if the long bond yield reaches parity with the 30 year German bund? Not saying it will, but if it does, you've got yourself a tidy little mid teens capital appreciation to go with your 3.8% yield, with no principal risk.

While that may sound like a nice risk adjusted trade, it's not one I have put on, because I don't necessarily buy the parity premise. YMMV.

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